Friday, October 24, 2014

Market Week Wrap-up

Global markets quieted down this week, allowing participants to focus on
corporate earnings and economic fundamentals. There was a glimmer of hope in
Europe, where German and Eurozone flash October manufacturing PMI data saw very
modest improvement, while officials worked hard to back away from a big battle
over France's flawed 2015 budget and discussed a potential €300 billion public
investment plan. In the US, inflation continues to stubbornly avoid showing,
with September CPI reading just about flat. The preliminary Markit October
manufacturing PMI data was a bit soft, in a reading that missed expectations
and saw its lowest level since July. Earnings season hit full stride with
corporate reports mostly leading stocks higher, though some high profile names
disappointed. For the week, the DJIA gained 2.6%, the S&P500 added 4.1% and
the Nasdaq rocketed 5.3%, marking the best gains of the year for the broader
indices.

A wave of enthusiasm spread over financial markets on Tuesday on press reports
that the ECB could start buying corporate bonds to complement its ABS purchase
program. The reports led some participants to believe that a more fleshed-out
QE program was under consideration. Two ECB members, Nowotny and Coene, poured
cold water on the stories saying the MPC had held no discussions on corporate
bond purchases.

All was quiet on the Ebola front this week until Thursday afternoon, when New
York City reported its first confirmed case of the disease. Dr. Craig Spencer
was placed in isolation at New York's Bellevue Hospital days after returning
from a volunteer stint in Guinea treating Ebola victims. Spencer had been
self-monitoring, but had also spent a fair amount out on the town before
starting to feel fatigued and feverish. Ebola treatment developers and sanitary
equipment manufacturers had traded lower this week before the announcement as
no new US cases were announced and people in Texas came out of quarantine, and
the bounce higher and Thursday and Friday was not very robust.

Amazon and IBM reported some buggy quarterly results. Amazon was sent to the
woodshed after reporting its biggest quarterly loss ever on Thursday afternoon.
The reported loss was much steeper than projected, fourth-quarter guidance was
weak and the company wrote down $170 million related to the company's Fire
Phone, widely seen as a big flop. IBM missed top- and bottom-line expectations
and cut its FY14 and FY15 forecasts, blaming a "new definition of
calculating continuing operations." This was the tenth straight quarter of
falling revenue. At the same time, IBM agreed to pay Globalfoundries $1.5
billion in cash to take its processor business off its hands.

Apple had stellar results in its third quarter. Earnings and revenue growth
were impressive and above expectations, margins were strong and iPhone
shipments were at the top end of market estimates. Note that Apple executives
warned the strengthening USD is becoming a significant headwind. The company
also launched its Apple Pay service on Monday at thousands of retail stores, with
early reports suggesting only some minor glitches that Apple has promised to
fix with a software update.

The DJIA's big junk food components, Coca-Cola and McDonalds, turned some
unhealthy third quarter numbers. Coke met earnings expectations, gross margin
was up a bit y/y, and global volumes looked good. However, the -1% volume
decline in North America was a sign of trouble, and the firm warned that it
would be below its long-term EPS growth target for 2014. McDonalds missed top-
and bottom-line expectations, the declines in worldwide comps accelerated from
Q2, and management warned October comps would remain in the red.

General Motors, Ford, and Caterpillar saw strong third-quarter results. Shares
of Caterpillar posted solid gains after its numbers crushed expectations and it
raised FY14 guidance. Gains in the firm's construction and energy equipment
sales are seeing good growth, offsetting the steep declines in mining hardware.
GM's third-quarter earnings rose 98% y/y, bolstered by strong North America and
China results. Ford's profit was better than expected, however both sales and
revenue declined on a y/y basis thanks to the impact of a big round of product
launches.

Consumer name Proctor & Gamble cleaned up nicely as first quarter results
met expectations, although revenue growth was limp. P&G also confirmed that
it would check out of the Duracell business by creating a stand-alone company,
possibly via a spin-off to shareholders. Analysts note that the unit has been
on the block for years and the company has had a hard time generating interest
in a sale. Competitor Colgate is looking tarnished after the firm warned FX
issues cut deeply in the quarter and forced the firm to reduce its full-year
guidance.

Coming into the week, the euro continued to move up off the two-year lows
against the dollar seen in early October. EUR/USD traded as high as 1.2840
until the ECB corporate bond buying story on Tuesday turned the pair around.
EUR/USD glided back down to the low 1.2600 handle on Thursday, when better
October flash manufacturing PMI data for Germany and the Eurozone helped arrest
the slide. GBP/USD held below key technical resistance in the 1.6210 area,
which corresponded the summer downtrend line in the pair. The BoE minutes saw
no changes, and speculation that they could be on the dovish side was brushed
off as MCP would not have seen the ominous September CPI inflation data at the
time of the meeting. GBP/USD had trouble retaking the 1.6100 handle.

China released the balance of its September economic data, which along with
October HSBC flash manufacturing PMI were steady but uninspiring. The Q3 GDP
reading of 7.3% was just above consensus but still a 5-year low. Industrial
output beat estimates, but power generation growth sank below 5%. Both retail
sales and fixed asset investment growth was in low double-digits, but still
marked multi-year lows. The HSBC PMI hit a 3-month high, but the output
subcomponent slowed to a 5-month lows. Finally, September housing price data
further confirmed the slowdown in the property space, as y/y prices fell 1.1%
after rising 0.5% in August. For the week, the Shanghai Composite was down 1.7%
- a second consecutive losing week after an impressive 2-month rally.

Political maneuvering in Japan is bound to become more pronounced as the
cabinet draws closer to the expected decision on the second round of
consumption tax increase, particularly with the country's economic progress
increasingly lagging. Japan confirmed its 27th consecutive month of trade
deficit this week, while the government cut its economic assessment for the
second straight month due to soft spots in consumption. Influential advisor to
PM Abe, Etsuro Honda, recommended that the next round of sales tax hikes be
delayed until 2017, however Finance Minister Aso countered that foregoing the
tax hike would jeopardize global investment trust in Japan's fiscal state.
Traders are anxiously awaiting the Bank of Japan policy decision next Friday,
as it will be accompanied by the BOJ's semi-annual Outlook Report providing the
latest forecasts for GDP and inflation. The BOJ may also justify some further
monetary policy easing to offset any fiscal strain if the tax hike is in fact
postponed.